Nasscom: ‘Budget strong on basics; but disappointing’

NEW DELHI: National Association of Software and Service Companies, the apex

association for the software and service companies in India has welcomed the

Union Budget proposals as one that consolidates the ongoing reform process,

focuses hard on key infrastructure issues, and recognizes the need to strengthen

agriculture and rural development. However, Nasscom is worried that

inconsistencies in tax regime could hamper India's competitiveness in global

markets.

In its pre-budget memorandum, Nasscom had urged the government to maintain a

status quo on the tax incentives to the software and service sector, which is

likely to emerge as the largest exporter during 2002-03.

In the Finance Bill 2002, the Finance Minister has proposed a reduction in

the deduction from 100 per cent to 90 per cent of export profits under section

10(A) and 10(B) of the Income Tax Act.

As recently as April 2000, the Finance Minister had announced a long-term tax

policy in order to provide a stable policy regime for the software and services

sector, wherein the tax holiday was announced for the decade ending March 2010.

This policy had resulted in a large number of overseas investors making India a

preferred destination to set up their software and back office operations.

While the revenue gains from the announced provision will only result in

marginal revenues to the exchequer; it is clearly a retrograde step. Nasscom

understands from the Notes to the Finance Bill that this provision applies only

for the A.Y. 2003-04.

Nasscom chairman Phiroz Vandrevala said, "we recognize that this

provision is valid only for the coming financial year. However, such

inconsistencies in the tax regime will affect the confidence of overseas

investors in the Indian software industry; especially since other countries such

as China, Ireland, Philippines are pulling all stops in providing incentives to

attract FDI in this sector. Domestic companies will find it difficult to plan

their future strategies and investments in light of the uncertainties created by

inconsistent policies. Hence, we are confident that the government will withdraw

this provision and abide by its commitments made to the fast growing, globally

competitive software industry."

Nasscom president Kiran Karnik added, "In the current challenging global

environment, Indian companies, especially SMEs and ITES companies are making

significant investments in setting up sales and marketing infrastructure in the

overseas markets. This withdrawal of tax exemption would reduce their investible

surplus and affect marketing efforts during the year 2002-03."

Nasscom is also disappointed with continuation of sub-section (9) under

Section 10(A) and Section 10(B). As per this clause, if during the year, more

than 51 percent of shareholding (beneficial interest) changes in a 100 per cent

EOU, STP, EPZ then the company will cease to get Income Tax exemption from that

year. This provision adversely affects the ability of companies to raise funds

either from capital markets or venture capitalists.

Nsaacom welcomed certain provisions that are likely to enable larger software

companies to strengthen their global competitiveness through acquisitions or

alliances. These include

-Indian companies being permitted to invest upto $ 100 million overseas

-Indian companies being permitted to make overseas investments in joint

ventures abroad by market purchases without prior approval up to 50 per cent of

their net worth

-Nasscom also welcomed the lowering of customs duties on components and

capital equipment for computer hardware, stating that this will improve

competitiveness of domestic hardware producers, bring about a reduction in

prices of computers and result in increased IT penetration in the country.